I’ve made a number of comments about peer to peer (P2P) lending over the last few years which might suggest that I am fundamentally opposed to this type of activity. However, that’s not correct – I am delighted that people are trying to fill the gap left by the banks who seem supremely uninterested in supporting British businesses.
My concerns are that this is still a young sector which has yet to be tested in a serious recession. I suspect that many lenders will be disappointed with the returns they receive in that scenario. It will become clear that some of the P2P platforms have done little more than cursory due diligence on the borrowers and the misalignment of interest between platforms motivated mainly by transaction fees and lenders who rely on the return of their capital will come to the fore. That’s why I still feel that conferring the respectability of ISA status on these loans now is inviting trouble.
However, even in my worst nightmares I can’t see things getting as bad as they are in China. Earlier this year it turned out that Ezubao, one of the largest operators was just a Ponzi scheme and it looks as if lenders have lost billions. More recently Jiedaibao, a less prominent lender, has adopted a novel technique for encouraging its female borrowers to keep up their repayments: it requires them to post nude photos via WeChat. Jiedaibao threatens to publish these if the borrower falls into arrears. With interest rates of around 30% that seems quite likely.
I admire the lateral thinking adopted by Chinatou.com another lender. They seem to be facing some cashflow difficulties in meeting redemption requests. Fortunately the owners have a sister company that produces baijiu, the popular Chinese liquor, and have been offering bottles of this in lieu of cash. Maybe they are hoping that lenders will forget about their losses after a skinful of this stuff.
So if you see any of the UK P2P platforms engaging in merger activity in the drinks or media sectors that could be an early warning signal.
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